Gold climbs as the dollar falls on U.S. trade gap

PolyaLesova

SAN FRANCISCO (MarketWatch) -- Gold futures closed higher Tuesday, recouping some of their recent losses and sending their benchmark contract to its highest level in six months as a record U.S. trade deficit fueled a decline in the dollar.

But prices ended below the day's best level with news of disarmament plan for North Korea likely easing some of the interest in gold as a safe-haven investment.

Gold for April delivery closed up $1.20 at $668.50 an ounce on the New York Mercantile Exchange. It traded as high as $673.70, the contract's strongest intraday level since early August. On Monday, prices lost $5.

Gold prices spent the session trading steady to higher "in spite of news that North Korea has agreed to accept aid in exchange for shutting down its nuclear reactor," Todd Hultman, president of DailyFutures.com, said in comments on his Web site.

Six-nation talks held in Beijing ended with North Korea agreeing to take the first steps toward nuclear disarmament in return for economic aid, the BBC reported on its Web site.

Pyongyang has agreed to close its main nuclear reactor within 60 days, in return for 50,000 metric tons of fuel aid or economic aid of equal value. It has further agreed to allow international inspections to resume.

Wider deficit weakens the dollar

Meanwhile, the U.S. trade deficit widened by 5.3% in December, reaching $61.2 billion, the Commerce Department said Tuesday. The number exceeded the consensus forecast of $59.5 billion. See full story.

"The number that likely lit the fuse under gold today was the much wider-than-anticipated December trade gap," said Jon Nadler, an investment-products analyst at bullion dealers Kitco.com. Following the news, the dollar posted losses against major rivals. See Currencies.

"Reality certainly set in this morning as the U.S. currency took a dip against the euro, itself boosted by reports of better than 3% GDP growth in the euro zone," Nadler said, in e-mailed commentary.

Developing interest-rate differentials and portfolio diversification tactics point to a resumption of the slow but growing exodus from the dollar by a variety of investors, Nadler said.

Crude-oil and natural-gas futures, which have provided most of the price direction for gold recently, both climbed Tuesday. The International Energy Agency raised its global-oil demand forecast for 2006 and 2007, mostly because of higher expectations for demand from China.

Crude for March delivery closed up $1.25 at $59.06 a barrel. See full story.

Other metals prices followed gold higher. March silver closed up 1.5%, or 20 cents, at $13.915 an ounce after reaching a two-month high of $14.

"Looks like today might signal the week for silver to break out above $14 per ounce finally," said Neal Ryan, director of economic research at Blanchard, which has "been waiting on this one and expecting it to outperform gold and platinum for a while now."

March palladium added $6.85 to end at $344.60 an ounce and April platinum climbed $14.70 to close at $1,206 an ounce.

March copper rose 4.3%, or 10.7 cents to close at $2.5845 a pound, extending last week's gain of 3.9% after dropping more than 8% the week before.

March copper has seen a "solid bounce of support near $2.3850, the 50-percent retracement level of its long-term uptrend," said Darin Newsom, an analyst at DTN.

"Initial buying interest was non-commercial (speculative) short-covering, but deferred spreads are narrowing -- indicating there may also be some commercial-buying interest," he said in e-mailed comments.

On the supply side, gold inventories were unchanged at 7.49 million troy ounces as of late Monday, according to Nymex data. Silver supplies rose 599,378 troy ounces to stand at 115.43 million troy ounces and copper stockpiles dropped 296 short tons to 36,189 short tons.

Alcoa leads metals-mining shares higher

Among individual metals-mining companies, shares of Alcoa Inc.
AA, -1.08%
closed more 6% higher after a report that mining giants BHP Billiton
BHP, -0.17%
and Rio Tinto
RIO, -0.53%
are each contemplating bids for the Pittsburgh aluminum producer. See full story.

"This doesn't have anything directly to do with precious-metals markets, but should go to underscore the general trend in the mining industry that metals are being mined on Wall Street instead of being explored for in the field," said Ryan.

"This is no different than the consolidation that has been, and will continue to take place, in the gold-mining sector," he said, in a note to clients.

Overall, the report "this bodes well for increasing prices moving forward," he said, because consolidation means less production.

Tracking the metals-mining sector as a whole, the Philadelphia Gold and Silver Index
XAU, -0.39%
closed up 1.8% at 142.60 points and the CBOE Gold Index
GOX, -0.56%
rose to 148.56 points, closing with a gain of 1.9%. The Amex Gold Bugs Index
HUI, -0.19%
climbed by 1.7% to end at 342.59 points.

The DJ Wilshire Nonferrous Metals Index finished up 2.1% at 6,258.13 points. The DJ Wilshire Industrial Metals Index closed at 3,672.25 points, up 3.3%, and the DJ Wilshire General Mining Index added 4.8% to close at 1,301.23 points.

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